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The drug industry is consolidating as companies seek to define their vertical and horizontal markets. An increase in the dependence on generic drugs by governments, institutional buyers and businesses is a major factor in this consolidation trend. Investments in this industry should account for the possibly of continued consolidation. Companies that are considered prime targets include Wellcome PLC and Upjohn Co.

The drug industry will be affected by such factors as managed health care and the expiration of drug patents during the mid-1990s, and many companies will be merging. Government price controls may not come about because many firms have already dropped their drug prices without any regulation. After some firms close or merge, the remaining companies will offer some good investment opportunities, such as Pfizer and Merck.

Drug industry equities declined in 1993, and the maturing industry may be plagued with regulation problems during 1994. Drug companies are seeking different ways to make profits as de facto caps on price increases have cut into profits. Company policies to cut product prices and such business expenditures as marketing could bring in more revenue. However, investors may be attracted to these stocks for their income-producing advantages, rather than their growth potential.

The increasing consumer preference for generic products over brand named drugs has many pharmaceutical companies boosting cost containment measures. The health reform proposals by the Clinton Administration may significantly impact individual companies depending on what the final bill looks like. However, stock prices for drug companies have already been discounted in anticipation of reform and some have regained some of their earlier losses. Drug company stock prices may have potential for price appreciation beginning in 1996.

Tele-Communications Inc's merger with Bell Atlantic Corp prompted purchases of Bell Atlantic Corp stock and stocks of companies with connections to telecommunications. Pharmaceutical companies may acquire more generic drug companies. The finances of Syntex and Upjohn are discussed.